Barack Obama’s efforts to extend a cut in payroll taxes for American workers – likely to be one of the largest measures in the jobs package the president will present next week to boost the ailing US economy – is already facing resistance from sceptical Republicans.
For months, Republicans have been fighting for low taxes as the recipe to revive sluggish economic growth in the US, and the payroll tax reduction was partly designed as one form of economic stimulus that could appeal to conservative lawmakers.
But the Republican reaction has been decidedly cool – another sign of the persistent political challenges facing the Obama administration as it attempts to boost employment.
“It’s not a stimulative tax cut. We tried it this year, and obviously if you look at economic growth in the first two quarters…it simply hasn’t worked,” Ron Johnson, the first-term Republican senator from Wisconsin, told the Financial Times.
On Friday], the Department of Labor will release figures on job creation in August, with economists forecasting a gain of roughly 70,000 jobs. This would be a modest pace, slower than the 117,000 jobs generated in July and not sufficient to bring down the 9.1 per cent unemployment rate.
The latest reading on the labour market will set the stage for next week’s roll-out of Mr Obama’s jobs plan, expected at a rare speech to a joint session of Congress on Thursday night.
The White House is expected to propose provisions to boost infrastructure investments, as well as more tax breaks for businesses to spur hiring, some support for the housing market (though probably not a large-scale refinancing plan) and aid to the unemployed, including special initiatives targeting long-term jobless.
But the most economically significant measure could well turn out to be the payroll tax extension, whose cost of $110bn could easily dwarf the size of other proposals, and may be the foundation for everything else in the administration´s economic strategy.
Last December, Congress and the White House agreed to cut from 6.2 per cent to 4.2 per cent the amount of money that employees contribute to the Social Security system, the government retirement scheme.
But the reduction in the so-called payroll tax was only put in place for one year, meaning it will expire in four months, potentially injecting a dangerous dose of fiscal retrenchment into the fragile US economy in January. “It won’t give us an additional shot in the arm, but it will prevent us from backsliding,” said John Irons of the Economic Policy Institute, a liberal think-tank.
The White House could propose to tweak the measure, either expanding it to a 3 percentage point reduction, or adding a cut in payroll tax contributions from employers, who also pay a 6.2 per cent levy on their workers´ salaries, or both. But it is unclear whether any of those changes would win Republican support. Aware of the pitfalls of arguing against a tax cut, Republican leaders in the House are carefully weighing their words in criticising the measure, refraining from explicit opposition, but stating worries on two fronts.
The first is that the limited timeframe of the payroll tax cut undermines its effectiveness as economic stimulus, compared to permanent tax relief. Paul Ryan, chairman of the House budget committee, in June said it was an example of Washington´s propensity for “sugar high economics”.
The second is that dipping into Social Security could undermine the programme’s ability to fund itself in the future. A spokeswoman for Dave Camp, chairman of the House ways and means committee, told the FT: “The chairman has expressed some concerns about previous payroll tax proposals because of the impact on Social Security since less revenue will be going into the trust fund, which can create additional solvency challenges in the future.”
Some budget analysts believe Republicans will find it hard to throw a wrench into the payroll tax extension, since they could find themselves vulnerable to criticism that they are actually rooting for higher taxes.
“What we are talking about here is a tax cut for every working person in America,” said Michael Linden of the Center for American Progress, a left-leaning think tank. “ It’s hard for me to understand how [Republicans] would get away with [opposing] it,” he said.